Aging and Asset Prices

Axel Börsch-Supan (boersch-supan@mea.uni-mannheim.de), Alexander Ludwig and Mathias Sommer (sommer@econ.uni-mannheim.de)
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Axel Börsch-Supan: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim
Mathias Sommer: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim

No 07-29, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: This study quantifies the potential effects of aging on asset prices using a sophisticated overlapping generations (OLG) model with international diversification reflecting the global nature of capital markets. We show that the expected decline in the returns to capital will depend on the degree of international diversification. In the case of optimal diversification within the EU returns will drop by around one percentage point until 2035. The increasing risk aversion of an aging society will lead to differential effects on the returns on stocks and on bonds. We estimate the equity premium to rise by around 70 base points over the next 25 years. The sector that will be affected most by the demographic trend will be returns on real estate, however, only in the very long term. The main insight is that household size lags population size by about 20 years. One reason is that an older society features a smaller household size and thus, ceteris paribus, more households. Hence, housing demand will only begin to fall from 2025 onwards even if populations start declining today. Taken all evidence together, capital markets are not immune to demography. Rates of return will decline in response to demographic forces, but only very moderately. There is no scientific reason to assume that a major “asset meltdown” will occur when the babyboom generation retires.

Pages: 73 pages
Date: 2005-07-30
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Aging and Asset Prices (2007)
Working Paper: Aging and asset prices (2005)
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